With stock market prices fluctuating so frequently, especially just prior to announcements, many buyers try and 'beat' the market and predict movements in order to return abnormal yields on their investments.
Fama and EMH
There has been much discussion regarding the ability to be able to predict and with this developed the Efficient Market Hypothesis partly created by Fama; this states that any new information about stocks are already reflected in the share prices and therefore those who believe they have an advantage through new knowledge will not be able to take that advantage because the prices will have changed appropriately and the market reacts completely randomly (Investopedia, 2013). Due to Fama's hypothesis he states that there is no reason to study previous movements or use investment advice from experts claiming to know how the markets will react, it is all, as Fama claims, a waste of time and an attempt to achieve the impossible.
There are three forms of effective market hypothesis: Weak form states that prices already reflect all past publicly available information, the semi-strong form backs this and goes on to say that any new information released is reflected in changes to prices. Many believe that if they have knowledge not known to the public, such as 'insider' knowledge then they will have an advantage and can use the knowledge to return greater yields, however the third form, strong, states that even insider knowledge is reflected in share prices and therefore even insider knowledge is ineffective (Boundless).
Fama also stated predicting the stock market is like taking a random walk due to the speed at which the market reacts to new information, therefore it is impossible to predict (Vulić)
Opposition to the hypo-theory
As with all theory's there is competition to EMH who believe the market prices can be predicted and abnormal gains made. Many tests have been completed in order to test the effectiveness of EMH, most popular of these is the Augmented Dickey–Fuller test but there have been many more analysing different aspects of EMH and stock markets. Technical analysis, which analyses past price actions to advise for future trades, directly opposes the idea that a market is completely random and believes that past trends can be used to predict. Neely (1997) proposed three elements of technical analysis: the first being that price movements reflect hopes, fears, greed and optimism of the stock market participants, many believe stocks are valued not at their value but what people believe their worth to be. The second and third principles both involve the idea that history and trends are very helpful, they hold the belief that history and trends do not suddenly become random and do follow a pattern as people will always react the same way (Dixon, 2005). In my opinion the emotional make-up of investors does not always remain the same and past trends will also not remain consistent throughout trading years.
Conclusion
The debate of whether or not you can predict or even 'beat' the market will always be one of issue and will split many opinions and continue to be tested. In my opinion I do not believe anyone can be sure that past trends are likely to predict current trends and as EMH states, even new information leaked is reflected in share prices especially as investors are now able to react so quickly to information.Therefore, whilst some may be able to return abnormal yields on investment, it is not due to analysis rather than anomalies and I do not believe the market can be effectively and consistently beaten.
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